International tax competition: Research and development

Transcription

1 International tax competition: Research and development Mag. Alfred Heiter, Director of fiscal & legal policy 19. November 2014 Ludwig Urban Saal, Haus der Industrie

2 Importance of R&D in knowledge-based economies R&D is vital for the knowledge-based economies competitiveness in a more and more globalized world, but Undersupply of funding for innovative projects Difficulty for companies to reap full commercial benefits of innovations (due to spillover effects) less incentive for firms to invest in innovation than is socially optimal Public policy plays an important role in orienting innovation efforts so that they help address domestic and global challenges. 1

3 Status Quo: Level of R&D expenditures Lisbon strategy & Lisbon target: investment in European R&D must be increased to 3% of GDP by 2010 target was not reached; still one of five Europe 2020 targets EU-28 s R&D expenditure in 2013: 2,02% remains well below ratios recorded in Japan (3,38% in 2011) and the US (2,81% in 2012) Goal: Stimulating private R&D activity in order to enhance job creation and economic growth Source: Eurostat 2

4 Tools to promote R&D and innovation Direct public funding from both national and EU sources Indirect public funding in the form of R&D tax incentives schemes Tax incentives on IP revenues and other profits (e.g. patent box) 3

5 Status Quo: R&D in Austria Austria s R&D expenditure relative to GDP in 2013: 2,81% 4

6 Tools to promote R&D and innovation Direct public funding from both national and EU sources Indirect public funding in the form of R&D tax incentives schemes Tax incentives on IP revenues and other profits (e.g. patent box) 5

7 Direct public funding - National funding programmes available via public funds: Austrian Research Promotion Agency (Österreichische Forschungsförderungsgesellschaft) Focus: applied industrial research Austrian Science Fund (Fonds zur Förderung der wissenschaftlichen Forschung) Focus: basic research Austrian federal promotional bank (Austria Wirtschaftsservice GmbH) Focus: Assistance of companies in their implementation of innovative projects by granting loans, awarding subsidies and issuing guarantees at favorable interest rates 6

8 Tools to promote R&D and innovation Direct public funding from both national and EU sources Indirect public funding in the form of R&D tax incentives schemes Tax incentives on IP revenues and other profits (e.g. patent box) 7

9 Indirect public funding - Tax incentive scheme: Austrian tax credit 108c Austrian Income Tax Act Permits a firm to deduct from it s taxable income not only it s actual R&D expenditure, but, in addition, 10% over and above this expenditure Can be claimed regardless of a whether a profit or loss is recorded Can be claimed for In-House and subcontracted R&D 2013: Tax credit amounted to 378 Million 8

10 Qualifiying activities R&D expenses include costs of personnel and materials, overhead costs, financing costs and capital expenditures Qualifying activities include basic and applied research, as well as experimental development within the meaning of the OECD Frascati Manual Must be conducted systematically with the purpose of increasing knowledge and/or developing new applications 9

11 Types of R&D work In-house R&D work Unlimited tax credit R&D work has to take place in an Austrian business unit or an Austrian permanent establishment. Must be approved by the Austrian Research Promotion Agency (FFG) Subcontracted R&D work Cost basis is limited to 1 Million tax credit is limited to Principal must be an Austrian business unit or an Austrian permanent establishment; the R&D work can be performed in the EU and EEA Subcontractor must be a qualifiying EU/EEA institution 10

12 Advantages of tax incentives over direct aid Fiscal support is predictable for firms, other than direct (discretionary) project-based support instruments Low costs of administration for government and compliance for firms Requirements for tax incentives are comparatively transparent Relatively low barriers to access fiscal support schemes 11

13 Tools to promote R&D and innovation Direct public funding from both national and EU sources Indirect public funding in the form of R&D tax incentives schemes Tax incentives on IP revenues and other profits (e.g. patent box) 12

14 Tax incentives on Intellectual Property revenues: IP box regimes designed to help support innovation and encourage companies to see the respective country as an attractive place to develop and exploit Intellectual Property (IP) significant tax reductions (often around 10% or below) for income deriving from patented products compared to other income 13

15 Differences between convential tax incentives and IP boxes Tax incentives are on the input side: provide incentives to invest more in a key buliding block of innovation, namely research. Patent boxes go a step further provide incentives to spur commercialization of research outcomes Way to link tax incentives to success at commercialization of an innovation Commercialization rather than simple conduct of R&D is a key driver of economic growth 14

16 The recent emergence of IP boxes As IP is ever more mobile, nations that hope to attract innovation-based businesses need attractive tax policies over the years a number of countries have introduced such regimes UK: 10%, NL: 5%, ES: 12%, BE: 6,8%, HU: 9,5%, FR: 15,5%, LI: 2,5%, LU: 5,84% 15

17 16 IP Box regimes in Europe: Austria surrounded

18 Need for IP box in Austria Additional tool to promote innovation - Importance of innovation as a source of sustainable growth in a knowledge-based economy Necessary to compete against businesses in countries providing robust innovation incentives European competitive advantage: possibility to gain an edge over USA (low energy prices!) or Asia (low labour costs!) 17

19 IP boxes in the context of BEPS As part of the BEPS project, OECD/G20 group has published a report in Sept 2014 on countering harmful tax practices more effectively Report is at least generally supportive of favourable tax treatment of IP Main recommendation: there needs to be a clear link between the revenues and the expenditures contributing to that income (proxy for substantial activity) 18

20 Proposal for an Austrian IP Box regime Firms that have significantly contributed to the development of an innovation would be able to exempt up to 60% of the patent income from taxation when linked to substantial activity Possibly included income: Patents, unprotected patents (standardized controll-process by the FFG could be installed), supplementary protection certificates, authorisations for sale of medicine, exclusive license for a patent Possibly not included (technical difficulties): registered design (not necessarily innovative), trademark rights, registered pattern 19